Brett emails: I have a mortgage at 5.125%, a car loan at 4.25%, and a personal loan at 10.36%. We have been making extra mortgage payments and I have been making extra car payments. I have not been making extra payments to the personal unsecured loan. I know conventional wisdom says to eliminate bad debt with higher interest rates first, but for some reason I hate the fact of throwing extra money towards the one that won't build up equity. Is this OK?
Hi Brett: I have to agree with conventional wisdom here. At 10.36% your personal loan is by far your most expensive debt in terms of interest and should be addressed with higher priority. Your emotions are taking over. And as common as that is, we know it usually isn’t the best approach when making financial decisions. Save your money instead. Once you’ve paid off the personal loan, consider making extra payments toward your other outstanding balances.
Another reason you may not want to aggressively pay off your mortgage, according to Gerri Detweiler, credit expert at Credit.com, is that your home loan interest may be tax deductible if you itemize. The interest payments could help to reduce your taxes. On the other hand, “the personal loan interest is not [deductible], unless the debt happened to be used exclusively for business purposes,” she says. Detweiler also suggests looking at refinancing your mortgage and auto loans to save even more.
Finally, a personal loan, while unsecured, does help to build a unique type of equity we often don’t think about: your financial security. The earlier you pay off that loan, the earlier you’ll be able to raise your personal equity, won’t you? Remember, individuals are valuable assets and those extra payments toward your personal loan will mean more money back in your pocket, boosting your financial status.
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